Why a Cash Flow Projection Can Keep Your Business Alive

NOTE: scroll down to the end of this article to download a complimentary excel file including a cash flow projection template for you to use

The Importance of Cash Flow Projections

Cash is king. It’s the lifeblood of every business. Without cash flow, it becomes impossible for a business to pay employees, order inventory or make financing payments. Unfortunately, cash flow isn’t always consistent or easy to predict.

One useful tool for predicting cash flow is a cash flow projection, which is a tool that business owners or managers can use to estimate revenue, expenses, and cash balances over time. A cash flow projection allows a business owner to see a cash crunch before it happens and gives the owner the ability to make necessary changes to keep the business running smoothly.

How to Build a Cash Flow Projection

A cash flow projection is one of the easier bookkeeping documents to build and maintain. There are no complicated accounting or tax principles involved. The only ingredients in a cash flow projection are how much cash you have, how much you plan to receive, and how much you plan to spend.

A cash flow projection can be kept in any form that you find appropriate. However, an Excel spreadsheet is often the most convenient method.

The first step in building the projection is to determine what time intervals you want to track. Most projections are done monthly, but you can use any interval you want. Quarterly is probably the longest length of time you’d want to track. If your cash flows are very unpredictable or if you are already in a cash crunch, you may want to tighten your time frame and keep track of cash flow on a weekly basis.

Let’s assume we are going to project our cash flows for the upcoming year using monthly intervals. We would enter all 12 months along the top row of our spreadsheet. In the first column, we’d break down our main categories: opening balance, revenue, expenses, and ending balance.

Starting with January, we would enter the opening balance of our cash-on-hand. This may be cash in any bank accounts and cash physically held at your business. We would then list and add in all expected revenues for the month of January. By adding revenues to our opening cash balance, we come up with the total amount of cash available to use in January.

Next we would list our expected expenses. These should be anything that will be paid by cash and can include things like payroll, accounts payable, taxes, debt payments, and insurance. We then subtract the total expenses from the sum of our revenues and opening cash balance.

That calculation gives us our end of month balance. If our ending balance is greater than our beginning balance, then we have accumulated cash during the month. If the ending balance is less than the opening balance, then we’ve spent more than we’ve brought in. If our ending balance is negative, then we are out of money and need to take action to cover the deficit.

For planning purposes, you can use each month’s ending balance as the starting balance for the next month. As you move through the year, you’ll change these numbers to reflect the actual balances. However, estimating them for the full year will allow you to predict cash crunches and plan for cash flow financing accordingly.

Why a Cash Flow Projection is Vital to Your Business

Ideally, your ending balances would grow every month. That would indicate consistency and profitability. Unfortunately, that’s not always the case in business. You may have a large, unexpected expense one month or you could have a large customer fall through at the last minute. These things happen.

By planning and projecting your cash flow, you can take the actions necessary to keep your business running. If you see that your business is in danger of running a deficit one month, you could use that information to fund the deficit ahead of time.

You may need to cut back on expenses in the months leading up to the deficit. It’s easier to spread cutbacks out over several months than to try and budget for the deficit in one month.

You could also pursue financing for your operations. You’ll find it easier to obtain financing at reasonable terms if you do it ahead of time rather than if you try to do it at the last minute.

No business should go under because the owner didn’t see a cash crunch coming. A cash flow projection can help you look into the future and predict rough spots for your business. By taking action now, you could save yourself and your business later.

Download a Business Cash Flow Projection Template

Author: Marc J Marin